The Federal Reserve cut interest rates by 25 bps in November, following closely behind the half-percentage point cut in September. This rate cut marks the second in more than four years.
Several more cuts are expected to follow in the coming months and the initial cuts come after the Fed raised rates 11 times between 2022 and 2023 to combat inflation pressures.
Here’s what lower interest rates mean and how the news could affect your finances.
What is the federal funds rate?
The Fed adjusts the federal funds rate to keep the economy growing at a healthy rate. When inflation is trending down, dropping interest rates can help stimulate economic activity (and can, in turn, ultimately help raise employment levels, too). Typically, banks adjust their rates accordingly. That likely makes borrowing money more affordable, while bringing lower rates on savings products. If you’ve been building up your savings, you might consider starting to invest to expand your financial portfolio.
Read more: Take our quiz to find the right investment account for you.
There’s no need to rush into any financial decisions when interest rates change, but there are some actions you can consider.
How falling interest rates could impact your finances
Your investment portfolio
Generally, interest rate cuts stimulate the stock market. 12 of the last 14 rate cut cycles since 1929 saw positive S&P 500 returns over the subsequent year. With any fluctuating market, changes to interest rates will have some effect on your unique portfolio, but there are always steps you can take to tend to your investments. For instance, maintaining a diverse portfolio can help you offset the effects of any changes in the market.
You might also consider a robo portfolio or financial advisor through Ally Invest. A robo portfolio can make adjustments that are appropriate for the current market environment, easing the need for spur-of-the-moment money decisions, while a financial advisor can help guide you through changes and decisions.
Your debt
Lower interest rates often push banks to adjust the rates they provide for their customers. You might see your APR lower, which is good news for anyone with credit card debt.
If your bank decreases the interest rate on your credit card balance, you might choose to apply the money you’re saving on interest toward paying off your credit card balance.
Your money
If you’re earning interest on money in a savings account or planning to open a new Certificate of Deposit (CD), those will likely have a lower APY after rates fall. Lower rates don’t mean you need to move your money, though. You can still benefit from smart savings tools in your Ally Bank Savings Account, and any existing CDs you have will retain the rate you locked in until they reach maturity.
Use our interest calculator to evaluate how much you might be earning after APY rates adjust and determine the right move for your financial goals.
Your retirement
If your retirement funds are in a 401(k) or IRA and invested in the market, their performance will be tied to how well your specific retirement investments are doing. You might see a spike when rate cuts are announced, but remember these investments are for the long haul and will see many ups and downs in their lifespan, so keep your timeline in mind and your emotions in check when you see movement.
Your home
Potential homebuyers may be waiting for lower mortgage interest rates before they purchase. Assess your overall financial readiness for a home purchase and consider buying when the right home comes on the market. If you’re a current homeowner with a higher rate, you can also consider a refinance.
The bottom line on lower rates
When the Fed makes a rate cut, it’s good to be prepared with knowledge of what these changes mean. Instead of trying to perfectly time the market, focus on your financial goals and how any potential rate changes will affect your plans.
